"This Is Unprecedented Territory" - Pakistan Shoots Down 2 Indian Fighter Jets In Dramatic Border Conflict Escalation

Update 2: Pakistan is now saying that only one Indian pilot is in custody...and India has confirmed that only one pilot is missing. Meanwhile, there have been reports of "heavy exchange of fire" in multiple areas along the border.

Regarding the detained pilot, India's Ministry of External Affairs has lodged a "strong protest" after summoning Pakistan's deputy high commissioner. In a statement, India accused Pakistan of violating the Geneva Convention by shooting down its planes, and said that it expects the "safe return" of the detained pilot.

Theresa May took a break from the ongoing Brexit negotiations to "urge restraint" in the conflict, according to Reuters.

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Update and recap: After some initial confusion and conflicting statements about the number of aircraft involved in Wednesday's hostilities, Bloomberg has produced this roundup of remarks from both sides that helps to clear things up. The follow-up included Pakistan's description of shooting down Indian jets.

  • Indian and Pakistani fighter jets engaged each other, resulting in the worst escalation since the war between the two in 1971.
  • Pakistan said it engaged six targets across the de facto border between the nuclear-armed neighbors. Pakistan said its fighter planes shot down two Indian fighter aircraft that entered its airspace. Two Indian pilots were in its custody, one of them in hospital.
  • India admitted to losing one MiG 21 fighter jet in the aerial engagement. India's Kumar said the pilot of the plane is "missing in action," and the government is ascertaining Pakistan's claim of their custody. India said it shot down a Pakistani fighter jet today.
  • Pakistan PM Imran Khan in his address to the nation sounded conciliatory, saying he was willing to investigate the Feb. 14 terror attack in Kashmir. He said a war won't be in his or in Indian Prime Minister Narendra Modi's control and called for a dialogue between the two.
  • China's Foreign Minister Wang Yi called for India and Pakistan to exercise restraint and offered to play a "constructive role," while U.S. Secretary of State Mike Pompeo urged the two nations to "avoid escalation at any cost."

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Markets had already been bracing for an insanely busy session - with risks ranging from Trump's meeting with Kim Jong Un in Hanoi, to Michael Cohen's Congressional testimony, to Fed Chair Jerome Powell's second testimony before the House Financial Services Committee (including Maxine Waters and AOC) - when they were confronted in the early morning hours on Wednesday with the prospect for nuclear war along one of the world's most volatile borders.

One day after Indian fighter jets crossed into Pakistani territory to destroy a training camp purportedly belonging to the militant group that carried out one of the deadliest terror attacks in the 30-year history of the Kashmiri insurgency (Pakistan offered a different version of events), two Indian fighter jets have been shot down over Pakistani territory in what analysts described as the biggest escalation in tensions between the feuding neighbors since the end of the 1971 Indo-Pakistani war (which resulted in the creation of Bangladesh).

Screenshot from video reportedly showing the wreckage of the MiG-21 plane downed by Pakistan

India

Both countries responded by shutting down large swaths of air space.

Pakistan

One Indian aircraft landed inside Pakistan-controlled Kashmir, and the other crashed on India’s side of the Line of Control, the border that runs across Kashmir, according to military spokesman Asif Ghafoor. Pakistan said one of the Indian pilots was injured and had received medical treatment, while the other had been taken into custody. "Both are under arrest and we are treating them with dignity," he said during a press conference in Islamabad. India offered a contradictory version of events, saying it lost one MiG 21 fighter jet, and that one of its pilots was missing in action. It also said it shot down one Pakistani plane, though Pakistani has said no such plane was in service.

India’s ANI news agency is reporting that a Pakistan F-16 which violated Indian air space was shot down three kilometers within Pakistan territory in Lam Valley. Ghafoor said Pakistan didn’t use F-16 planes in the operation.

Meanwhile, Indian paramilitary forces clashed with Kashmir militants in India-controlled Kashmir on Wednesday. Two militants were killed. One analyst told Bloomberg that we are now in "unprecedented territory."

"This is unprecedented territory - we haven’t had tit-for-tat air strikes between India and Pakistan since the 1971 war," said Anit Mukherjee, a former Indian Army major and assistant professor at the S. Rajaratnam School of International Studies in Singapore, by phone. "We don’t know what will come from this. But it seems like Pakistan has given a response. And there have been casualties -- captures, deaths."

The eruption of open conflict was a surprise as both sides had been seeking to deescalate the conflict only hours before. Secretary of State Mike Pompeo encouraged both sides to "exercise restraint, and avoid escalation at any cost." He noted that Pakistan’s priority was to avoid military action and take "meaningful action against terrorist groups operating on its soil."

Pakistan has sought help from the UN to dial back the tensions, while India - which is facing a major election in the coming weeks - has reportedly reached out to the US, UK, China, France and Russia.

Pakistan has sought help from the United Nations to de-escalate the situation, while India - which is facing national elections in a few weeks - reached out to countries including the US, UK, China, France and Russia and urged the government in Islamabad to take action against terror groups based in the country.

The incident immediately reverberated across domestic financial markets, with India’s rupee reversing gains, while Pakistan’s benchmark stock index plunged as much as 3.8% in Karachi. Across the border, India’s S&P BSE Sensex dropped 0.2% in Mumbai after gaining as much as 1.1 percent earlier in the day. Pakistan’s sovereign dollar bond due 2027 fell 1.7 cents on the dollar.

But assets rebounded after Pakistani Prime Minister (and former cricket star) Imran Khan struck a conciliatory tone, saying he was willing to investigate the terror attack in Kashmir.

"I again invite you, if we are ready for a dialogue on terrorism. We are ready but I will again say better sense should prevail. We should resolve our problems through dialogue."

Numerous cell-phone videos circulating on social media recorded the aftermath as Pakistani jawans took one of the pilots of the downed Indian planes into custody.

Another video purported to show one of the jets being shot down, as well as the smouldering wreckage that resulted.

As we pointed out yesterday, while the Indian military enjoys vast tactical superiority over Pakistan's, at least as far as conventional weapons are concerned, the Pakistani nuclear doctrine allows for the use of tactical nuclear weapons in a preemptive or offensive attack.

Graph

While it's true that both sides are facing tremendous pressure to not allow the situation to spiral out of control, merely the whiff of nuclear conflict - which hasn't been a front-and-center risk for financial markets since the summer of 2017 during the standoff between Trump and Kim Jong Un - might be enough to send global risk assets reeling.